A signal moment for the world’s biggest miner

There is no doubt that Nickel West was one of the assets originally slated for BHP’s spin off company and its expulsion to a class of its own suggests only that it is a more marginal proposition than most might have imagined.
AFR

Andrew Mackenzie
has confirmed a re-casting of
BHP Billiton
that will see the world’s biggest miner relinquish a school of assets strong enough to create a top 20 Australian company.

This is a signal moment in the long history of BHP and Billiton and one that marks the start of much more than it ends.

The courage of Mackenzie’s conviction commerce should not be diluted by the pre-emptive familiarity that has been manufactured by a steady flow of leaks and speculation since Project River’s preparation was revealed by The Australian Financial Review in April.

For all that we knew about BHP’s plan to create a new business of its sub-tier one businesses, there was much that we did not. Certainly Mackenzie has delivered some surprises. There is a big in, a massive out, and the way this asset will be delivered to its new owners will be rather less complicated than had been imagined.

The big out is Nickel West, the problematic foundation stone of the WMC business that BHP bought for $US7.3 billion back in 2005. It commands some sub-scale mines not large enough to fully support their legacy refinery and smelter business. As a result, Nickel West currently relies on external sources of nickel to run at anything like its efficient capacity.

The fate of Nickel West now rests solely on a sale process that has been running for six months and that is said not to have generated the level of interest BHP might have desired.

If a deal cannot be cut then it is hard to see how BHP will not contemplate closure of the operation.

There is no doubt that Nickel West was one of the assets originally slated for SpinCo and its expulsion to a class of its own suggests only that it is a more marginal proposition than most might have imagined.

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The surprise inclusion, on the other hand, is a chunk of BHP’s east coast Australian coal portfolio and, to some degree, this is a game-changer for the short and long-term value proposition for SpinCo.

The big new name in the smorgasbord of coal delivered to SpinCo is the Illawarra coal business. It is a nice business that sweetens BHP Queensland coking coal offering. But it is a sacrifice BHP had to make to drive the longer term value proposition.

The decision to treat with absolute equanimity the owners of the Australian and British listings is also a bit of a surprise.

BHP, through both its dual listings, is 40 per cent owned by foreign shareholders. And like Australian shareholders, they will get the chance to sell or stick with SpinCo.

The obvious risk is that international owners will be unable or unwilling to hold ‘em, with the result that there could be an awful lot of liquidity through the early days of SpinCo’s listing.

There is, though, considerable confidence inside Team BHP that the local market weighting of this new business will leave index players here short of stock and that this will underpin demand enough to soak-up whatever might fall out of Britain and the US.

BHP’s been a long-time chewing

It is worth pausing here to consider just how long it has taken BHP to get to this point.

In retrospect, it could be argued that the first visible step towards this demerger was taken in December 2011 when the nickel and aluminium silos were delivered to the executive auspice of then chief commercial officer Alberto Calderon. The singular motivation for that alliance was disposal.

But BHP has been chewing over the business case of a demerger of second-tier assets for a whole lot longer than that.

At the same time BHP made its aborted pitch for Rio Tinto in 2007, its acquisition and disposal team opened work on Project Origami. The plan there was to package up a concern of new listings for the huge pool of non-core assets that would sit inside mining’s first mega-major.

On and off for the next six years there have been routine assessments made of the options for releasing fully the power of BHP’s core fleet of operations (iron ore, coal, copper and petroleum) and more effectively harvesting the wealth locked-up in its second-tier portfolio.

In the end though, the transformation finally approved by the board is the cause and effect of Mackenzie’s appointment in February last year. And don’t doubt that Mackenzie made his intentions clear enough.

He promised a laser focus on costs and that the race for capital within BHP would be far more demanding. Only the best performers would win new capital and the lesser lights would be reduced to sustenance at best.

And then he started describing BHP has a business of four pillars that might be bolstered with a new one in the form of potash. From that point, this gig was up.

As we reported earlier this week, David Crawford will chair the new business and will not stand for re-election to the BHP board at this year’s annual general meeting. Current BHP chief financial officer Graham Kerr will be SpinCo’s chief executive and investor relations boss Brendon Harris will step-up to be SpinCo’s CFO.

From what we are told, the new board will be heavily populated by non-independents and a fair weight of them will hail from South Africa.

Kerr’s departure has required a re-jig of BHP group general management with current copper boss Peter Beaven becoming CFO and the company in search of a new face to run its massive South American copper business.